Pacific Gas and Electric Co. long relied on leak surveys to determine that its gas transmission pipelines were safe even as it was handing out bonuses to supervisors whose crews found fewer leaks and kept repair costs down, a Chronicle investigation has found.

PG&E did not scrap the leak-related incentive system until two years before the September 2o10 blast in San Bruno that killed eight people and destroyed 38 homes. It did so then only after three company whistle-blowers complained to PG&E's top officials and board of directors that the utility was encouraging supervisors to overlook possible safety threats.

The complaints led to an internal company audit in April 2008 that concluded the policy of providing incentives for finding fewer leaks encouraged crews to produce inaccurate surveys. The policy was among several factors keeping PG&E from being able to "effectively identify leaks and to reduce risks to employees and customer safety," the audit said.

Prompted by the audit's findings, PG&E conducted a rush inspection of its entire gas distribution and transmission system starting in October 2008. The surveys uncovered many more leaks than crews had found in checks performed since 2004.

By February 2009, however, state regulators were dissatisfied with the pace of the effort and noted that almost all the newly discovered leaks were serious. The findings indicated that virtually every leak survey PG&E had conducted since 2004 was "not effective" and that the public would have to endure a "reduced level of safety" until the makeup inspections were done, said Sunil Shori, an engineer with the California Public Utilities Commission.

Shori "strongly" urged PG&E to expedite the effort, but the work had not been completed before the San Bruno blast.

'A big, big deal'

After the disaster, PG&E performed emergency leak surveys of its entire urban gas-transmission system. In one month, the company reported finding 38 high-priority gas leaks, four of which were so serious the company had to report them to federal officials - compared with six for the entire previous year.

"This is a big, big deal," said Richard Kuprewicz, an independent pipeline safety expert in Redmond, Wash., who reviewed the 2008 audit conclusions about bonuses and leaks for The Chronicle. "They've got a major, major problem here."

Kuprewicz said the bonus system was "training and rewarding people to do the wrong thing" and emblematic of "a seriously broken process."

"This explains many of the systemic problems in this operation that contributed to the tragedy" in San Bruno, he said.

PG&E spokesman David Eisenhauer said the leaks-per-mile standard is used nationwide "to help utilities have an apples-to-apples comparison. It was one of many measures used to compare divisions within PG&E. However, it was never, and still is not, intended to be used as an incentive for people to find fewer leaks."

Federal rules

PG&E began providing leak-related incentives for managers before a 2002 federal law took effect requiring inspections for many gas pipelines, workers said. The federal rules dictated that operators use leak histories on urban pipelines in selecting an inspection method.

Leaks can be caused by several things, including failures in longitudinal seam welds - the problem that caused the San Bruno explosion. If a transmission line has a history of a certain kind of longitudinal weld failure, federal rules require that the operator test it either by filling a pipe with high-pressure water or running an automated device through it.

PG&E rarely used those methods before the San Bruno blast, however, calling pressure testing inconvenient and expensive, and arguing that automated devices could not navigate many of its lines.

Under the system PG&E had in place until 2008, managers would receive incentive bonuses if they met several performance standards, said Steven Segale, one of the three employees whose complaints prompted the internal company audit. One standard was based on the number of leaks a supervisor's crew found per mile on a gas pipeline inspection - the fewer the leaks, the bigger the bonus, Segale said.

The confidential summary of the April 2008 audit findings, which PG&E provided at The Chronicle's request, found that "for the past several years, division employees have been tasked with finding ways to drive this number down."

'You're killing me!'

Segale said managers had regularly pressured employees to downgrade leaks from the most serious, Grade 1, which have to be repaired immediately, to a lower-priority Grade 2 that could allow them to remain unrepaired for up to 18 months. He said everyone knew supervisors got incentive in the form of annual bonuses.

"They would say, 'You're killing me!' " said Segale, 52, of Fairfax, a gas-welding crew foreman and weld inspector for the company. "Or, 'My superintendent is going to take a piece out of my ass if I go over budget. Can't you make this a Grade 2 and not a Grade 1?' "

Eisenhauer, the PG&E spokesman, would not address whether the incentives mentioned in the audit were bonuses.

Another whistle-blower, gas crew foreman Michael Scafani, said he had long complained to management in the North Bay that customers were finding most of the leaks instead of PG&E.

"Leaks are my issue," said Scafani, a 35-year veteran with the company. "I fix them. I see the close proximity to houses, where the gas has accumulated. I'm really amazed that more houses haven't blown up."

Unaware of leaks

Scafani, 55, of Rohnert Park, has worked in the San Francisco and Marin arms of the company and, for the past 22 years, the Sonoma division. "Quite frankly, before 2008, we didn't do a very good job of leak surveys," he said. "It was embarrassing. We weren't aware of our own leaks."

Scafani said PG&E had gradually reduced the number of workers conducting leak surveys as fewer leaks were found. The low leak total, in turn, gave the company a false sense of security, he said.

"Everybody is reporting that we have this great, leak-proof system," Scafani said. "They are not finding leaks, so you don't have to fix them. Since you don't have to fix them, you don't need the employees."

Scafani said he complained to several managers over the years and finally secured a meeting with then-Chief Executive Officer Peter Darbee in early 2007.

Darbee, he said, appeared responsive, prompting both the audit and a November 2007 shakeup of North Bay management and the subsequent dismissal of other supervisors in charge of gas safety.

Still, the legacy of under-reported and problematic leak reporting set the stage for San Bruno.

Unexplained leaks

A Chronicle review of dozens of inspection documents shows that PG&E had well over 100 unexplained leaks on its urban transmission pipelines in the decades since the lines were installed, including as many as 33 on the San Bruno line alone.

At about the time Scafani approached Darbee, Segale and a third PG&E employee, gas measurement and control mechanic Jim Findley, complained about the bonus system's effect on leak surveys at a shareholders meeting in April 2007, also helping to prompt the internal audit.

The audit found other indications that PG&E had been overlooking dangerous leaks. When the company resurveyed its Marin division in 2007, for example, it found 95 new leaks, 10 of them serious, that apparently had been missed in the most recent check the year before.

The internal audit said the company had essentially lost control of its leak survey program. In addition to the incentive system, it cited supervisors and workers who were spread too thin and not always properly trained to perform surveys, and managers who failed to monitor their workers adequately and did not listen to their concerns.

The audit found that comparatively minor leaks discovered by crews had declined by 68 percent between 1999 and 2006. Auditors said that should have led PG&E to review whether the survey program was working as intended.

Mysterious findings

Scafani said he had examined records on other parts of PG&E's system, including the Fresno and Stockton divisions, during his own research.

In Stockton, he said, of about 300 leaks recorded in 2006, 95 percent were classified as Grade 3 - the most minor level. The industry average is about 25 percent, PG&E officials told him.

In Fresno, PG&E found 41 leaks in 2006, but a two-year-long intensive resurvey starting in 2008 turned up 7,628, Scafani said.

PG&E has said it has overhauled its gas-safety practices since the San Bruno disaster. The company replaced its CEO and gas-system management team last year and has begun pressure tests of hundreds of miles of pipeline. Last week, the company said it had validated maximum pressure levels for about 80 percent of its 2,000 miles of urban gas pipelines and planned to complete the rest by next month.

"Since 2007, things have changed for the better," Scafani said, adding that he hopes that the company's new management will be vigilant about monitoring leaks.

Kuprewicz, the pipeline safety expert, said that given the number of years the bonus system was in place, it could take more than just a management shakeup to turn around the safety culture at PG&E.

"The management process was backwards," he said. "It's very difficult to turn that management around."